Spain's largest banks have reported dismal results over the past 24 hours, hit by toxic real estate assets, and according to analysts, the results highlight the desperate need for Spain's banks to raise more capital.

"The underlying real estate market is only half-corrected,so when it fully corrects over the next year of two, the non-performing loans are going to keep spiking up which will keep eating into the tier-one capital so the need to raise more equity is going to be enormous and very, very pressing indeed."

BBVA reported that profits fell 44 percent in 2012 as it made 9.5 billion euros($13 billion) in provisions on bad real estate loans from the 2008 Spanish property crash. The gloomy picture continued elsewhere as Caixabank reported that profits tumbled nearly 80 percent last year to 229 million euros ($311 million) as provisions doubled during 2012 to over 12 billion euros ($16.4 billion).

Banco Popular Espanol reported its biggest ever net loss of 2.46 billion ($3.36 billion) euros in 2012, compared to a forecast of 2.38 billion euros made by analysts polled by Reuters.

On January 1, Spain's Central Bank revised solvency rules and set a new core capital-ratio target for Spanish banks of 9 percent. It also said that it will require a quarterly breakdown of what Spanish banks are including as core capital. New regulations from the Basel Committee on banking regulations have also called for more stringent minimum capital levels, so banks maintain sufficient assets to face future financial crises.

Chris Wheeler, bank analyst at Mediobanca, tells CNBC that the big question is what state the balance sheets of European banks are in.

Chris Wheeler, bank analyst at Mediobanca, told CNBC that Santander would be forced to "sell more businesses" in its attempt to raise more capital.

"One of the issues we're concerned about with Santander is that we think they have an issue with capital at the parent group level. They look perfectly well-capitalized but a lot of that capital is sitting in Mexico or Brazil, it's not actually sitting in Spain," he said.

Spain received 37 billion euros ($46 billion) from the euro zone to recapitalize four of its struggling banks in 2012. As part of a general restructuring of the Spanish banking sector, lenders were forced to transfer billions of dollars' worth of toxic real estate assets to a so-called "bad bank" at steeply discounted prices.

The average write down on the banks' property loans was 45.6 percent and 63.1 percent on foreclosed properties.

Spain's Banks Not Alone

Spanish banks aren't the only ones to suffer impairment charges. French bank Credit Agricolewarned on Friday that its latest earnings would be hit by 3.8 billion euros in writedowns. It said that the charges reflected the tighter regulatory environment. Dutch banking insurance group SNS Reaal is being nationalized at a cost of 3.7 billion euros to the state.

Investors have snapped up bank shares since late last year, spurring a major rally for financials.

"If we look at the share prices we see how strong the bank sector has been and that tells you that there is a degree of confidence in the market, [but] what state the balance sheets are really in,is the big question," Wheeler said.